An example of a direct agency cost is:
A) a manager turning down a value-contributing project because of its risks.
B) a manager expensing a large dinner on the company expense report.
C) a manager using too little debt within the company's capital structure because of the additional risk associated with debt.
D) all of the above.

Question

Quizplus · Accepted Answer

A direct agency cost is any expense incurred by a firm that is associated with the need to monitor and control its agents (managers) to ensure that they are acting in the best interests of the shareholders. In this case, a manager expensing a large dinner on the company expense report is an example of a direct agency cost because it is an expense that is incurred due to the need to monitor and control the manager's spending behavior. Choice A and C are not examples of direct agency costs.

An Example of a Direct Agency Cost Is